Rachel Reeves has been dealt a fresh blow after experts warned tax raids are “unlikely to succeed” at fixing the country’s broken public finances.
Analysts from Oxford Economics warned the Labour Chancellor’s attempts to balance the budget were likely to end in failure in a damning assessment.
They used evidence from a range of her “fiscal adjustments” which she has made in efforts to avoid a budget deficit.
Edward Allenby and Adam Slater wrote in the note published on Thursday: “A number of studies suggest that fiscal adjustments centred on expenditure reductions, rather than revenue increases, have a better chance of success.
“The failure rate for adjustments based on revenue raising is high, given the risk of dampening growth prospects without yielding material improvements to the public finances.
“We think prospects for the success of the UK’s fiscal adjustment programme look unpromising.”
Ms Reeves’s fiscal tightening measures – a combination of tax hikes and spending cuts – were announced in the Budget as the Chancellor scrambles to balance the books.
Oxford Economics estimated that the value of fiscal tightening over the parliament will be 2.8% of GDP.
The analysts warned the Chancellor the split between spending cuts and higher taxes was “similar to that seen in unsuccessful adjustments” where countries failed to slash their budget deficits.
“Our analysis above suggests the UK’s current fiscal adjustment plans are unlikely to succeed.”
This comes after the UK’s economy watchdog warned Ms Reeves this week she is at risk of breaking her own fiscal rules as it delivered its first verdict on the state of the country’s finances ahead of the Spring spending review.
The Office for Budget Responsibility forecast suggests Britain is on course for either spending cuts or higher taxes as weak growth and surging borrowing costs have burned through the £9.9billion left for extra fiscal headroom she had allocated.
Now, Ms Reeves could be on course for a Budget deficit thanks to her decisions.
It is thought that around 80% of a planned reduction to the deficit comes from higher taxes.
The analysts from Oxford Economics are not the only experts warning the Chancellor against this measure.
Confederation of British Industry (CBI) chief Rupert Soames said on Wednesday that the £40 billion in tax hikes announced in the October budget had ruined the “trust of British businesses”.
In a speech at a Birmingham event, he said: “The Budget may have worked to fill a hole in the public finances by significantly increasing taxes on business, but in filling one hole, it has created another—in the confidence and trust of business. This is not conducive to encouraging businesses to invest.”
“Up and down the country, businesses need to increase the rate of investment in growth, and they will only do that if they have confidence government policy will support them.”
The deficit has been born of a combination of cuts in forecasted growth, confirmed by the Bank of England last week, and the rising price of government borrowing – gilts.
Ms Reeves has pledged that day-to-day spending must be paid through taxes and cannot be financed through borrowing.
However, with economic growth forecasts downgraded and inflation still above the Bank of England’s 2% target, her room for manoeuvre is rapidly vanishing.
Reeves has repeatedly pledged not to raise income tax, VAT, or National Insurance for workers. But experts warn that this promise may soon become impossible to keep.
Stephen Millard, interim director of the National Institute of Economic and Social Research (NIESR), said: “If you are committed to those fiscal rules and hit by a shock, the only way to maintain stability is by raising taxes.
“Having ruled out certain tax hikes, the Government has backed itself into a corner.”
One option still available is increasing employer National Insurance contributions—something Reeves already did by £25 billion in her first Budget. But this risks stifling business investment at a time when economic growth is already floundering.
The Chancellor has also insisted she will not announce more tax rises in the Spring Statement, but fears are growing that she may have no choice but to execute another raid.
Express has contacted the Treasury for comment.